Archive for Sunday, July 28, 2002

The Motley Fool

July 28, 2002

Advertisement

Name That Company

Based in Kansas City, Mo., I'm a private company that has been delivering valuables to you for more than 30 years. My syndicate distributes to newspapers a wide assortment of comics and content, such as Dear Abby, Doonesbury, Ziggy, Garfield, Cathy, FoxTrot, Bizarro, Non Sequitur and The Mini Page. I used to distribute The Far Side and Calvin and Hobbes, as well. My creators include Roger Ebert, William F. Buckley, Anna Quindlen, Scott Burns and Ann Coulter. My publishing arm offers books, calendars, greeting cards and gift items. My UClick comics service enables newspapers to publish the latest comics online. Who am I? (Answer: Andrews McMeel Universal)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

The correct option

Coca-Cola (NYSE: KO) recently announced it would start treating employee stock options as an expense on its financial statements. Following suit the next day was media giant The Washington Post Co. (NYSE: WPO), owner of several newspapers, television stations, Newsweek magazine and more.

Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A/BRK.B), is a major shareholder of both firms and he sits on the boards of both. He has long been critical of the way most companies account for options.

In his 1998 annual letter to shareholders, he wrote: "If options are not a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where should they go?" (Learn more at www.berkshirehathaway.com, where you can access 25 years of Buffett's letters to shareholders.)

The Senate recently debated a bill that would require companies to do what Coke is now doing voluntarily. But since treating options as an expense will, in most cases, depress earnings, corporate lobbying against the bill was intense, and it was defeated. The issue is likely to resurface again, though.

We applaud these firms and the few other pioneers such as Boeing (NYSE: BA) and Winn Dixie (NYSE: WIN) for taking this step and allowing investors to get a much clearer and more realistic picture of their finances. Now, who's next?

Tapping toes on the Titanic

In 1999, I learned that I could play the stocks in a fantasy portfolio on AOL. After a few months of playing fantasy, I was ready for the stock market. I placed about $20,000 on companies and some mutual funds. Then I wanted more plays, but I didn't want to dig in my pocket.

My financial adviser said I had $15,000 of credit available from margin! I drove my $20,000 up to $120,000 in 12 months, holding stock in 38 companies on margin. It's not good to be on a roller coaster with margined tickets. By the time I wised up, I was left with 25 percent of my original money. From now on most of my plays will be in top-notch stocks. The experience taught me to let go of the Titanic, even if the music is good. D. Ehlers, via e-mail

The Fool Responds: As an inexperienced investor, you were playing with fire borrowing on margin. Be careful with how you're thinking about investing, too. Instead of "playing," you should be carefully selecting strong and growing companies that are priced attractively.

When average is good

Most mutual funds are problematic for investors. For example:

The majority of stock mutual funds tend to underperform the overall stock market average.

Many charge excessive loads, or sales charges, of 5 percent or more. Even funds that simply charge a typical 1 percent annual expense fee can significantly hurt your performance.

As funds grow bigger (and their managers usually try to grow them so they can collect more in fees), it becomes much harder to deliver strong results. The more money a fund has to invest, the more likely it is that significant sums will be invested in less promising companies, as the managers have to spread the money around.

If this is stressing you out, know that there's a simple solution. Instead of trying to find those few funds that do tend to beat the market average, and instead of winding up with sub-par funds that underperform, you can choose to match the market average. Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index. Two good options are S&P 500 index funds and "whole market" index funds that track the Wilshire 5000 index. The S&P 500 is an index of 500 leading companies in America. The Wilshire 5000, despite its name, contains just about every U.S. stock, big and small more than 6,000 right now.

While the average mutual fund will charge you 1.00 percent or more per year, index funds usually sport extremely low fees sometimes just 0.16 percent (that's less than a sixth of 1 percent). There's little turnover within index funds, too, which means minimal commission costs. Best of all, investing in index funds is simple, taking very little time or energy. Once you've invested in them, you can forget about them (ideally adding money periodically). However the stock market performs in the coming years, your index fund won't be far behind.

Learn more at www.indexfunds.com and www.fool.com/school/mutualfunds/mutualfunds.htm or read "Common Sense on Mutual Funds" by John C. Bogle (Wiley, $16.95).

Commenting has been disabled for this item.